Life insurance on the line

An electrocardiogram

TEXT OF STORY

Lisa Napoli: A few weeks ago, a pair of Irish hedge funds filed for bankruptcy after some risky investments went south. Ritchie Capital had invested in what are called "life settlement policies." That's basically where investors buy life insurance policies and profit when the original policyholders die. As Marketplace's Amy Scott reports, it's not the only way investors are cashing in on matters of life and death.


Amy Scott: You've probably seen the ads on cable:

Life Insurance Ad: If you're a senior like me, you may be surprised at how much you can be paid for your life insurance.

If you're over 65 and short on cash, you can sell your life insurance policy to a company like J.G. Wentworth. So-called life settlement companies pool your policy with others and sell it on to investors in the form of a bond.

Nick Potter is an attorney with the law firm Debevoise and Plimpton. He says unlike viatical settlement companies that target the terminally ill, life settlement companies focus on healthy seniors.

Nick Potter: Someone who feels that, well I could use the money now, and I might as well sell the policy and have someone else wager on the duration of my life.

Ghoulish? Certainly. Shady? Perhaps. Life settlement firm Coventry First is under investigation. State officials say the company may have underpaid people who sold their policies. Those bankrupt Ritchie Capital hedge funds invested in Coventry's life settlements.

Investors are exploring all sorts of ways to make money on your life or death. Mortality bonds, for example. They're issued by insurance companies to offset the risk of a natural disaster or pandemic.

Alex Krutov is a consultant with Navigation Advisers. He says when many policyholders die all at once, insurers are on the hook for a large amount of cash. Mortality bonds transfer that risk to investors.

Alex Krutov: If something happens, investors would lose money. Because those funds will go to insurance companies to help pay the claims to policyholders.

But if no disaster strikes, investors get paid. And handsomely.

The idea is catching on. Fitch Ratings says last year, insurers sold almost $5.5 billion in bonds related to mortality and life insurance. But if some insurers worry about policyholders dying, others fear they'll live too long.

One academic's come up with what he calls a longevity bond. Insurers and pension funds could buy the bonds to offset the risk of beneficiaries living longer than expected. So far, he hasn't found any takers.

In New York, I'm Amy Scott for Marketplace.

About the author

Amy Scott is Marketplace’s education correspondent covering the K-12 and higher education beats, as well as general business and economic stories.

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